Settlement reached with New Orleans distributor of Knauf-brand Chinese drywall

Attorneys in the Chinese-Manufactured Drywall Products Liability Litigation have reached an $8 million settlement with Interior/Exterior Building Supply LP, the New Orleans company that distributed Knauf-brand Chinese drywall in the Gulf South, and its primary insurers.

"A settlement has been reached with a major party to the litigation," U.S. District Court Judge Eldon Fallon announced Tuesday morning in a monthly status conference involving the roughly 10,000 cases that are consolidated in his court in New Orleans.

The deal, which is still subject to court approval, is the first monetary settlement in the nearly two-year-old case over corrosive drywall imported from China.

It calls for Interior/Exterior's two primary insurers, Arch Insurance Co. and Liberty Mutual Fire Insurance Co., to each put the $4 million limits of their policies into an escrow account.

The amount of money available to homeowners could grow later this summer as the plaintiffs plan to go to trial against Interior/Exterior's excess insurer, North River Insurance Co., which has another $72 million in coverage.

Lead plaintiff attorney Russ Herman said he hopes that the deal will create some momentum in the case and prompt other parties to the drywall fiasco to settle. "This sets a template for other class actions. We're hopeful that it's a domino effect," he said.

Attorneys for Interior/Exterior and its insurers declined comment in court Tuesday morning. Interior/Exterior admits no fault in making the settlement.

Drywall was imported from China from 2004 to 2008 because the domestic wallboard industry couldn't keep up with the demands of the housing boom and massive rebuilding efforts in the Gulf South after the ferocious 2004 and 2005 hurricane seasons. The drywall releases sulfuric gases that corrode metal appliances and components in homes, and residents of homes with problem drywall complain that it gives them headaches, respiratory and skin ailments. They have been stuck for several years living in houses they can't afford to fix and are unable to sell. No money has come their way because many of the foreign manufacturers are beyond the reach of the law, residential insurers won't cover bad drywall, and home builders say they're victims. Seasoned plaintiff attorneys have called it the toughest case of their careers.

The U.S. Consumer Product Safety Commission has received complaints from about 6,300 homeowners in 38 states, and some estimates say tens of thousands of homes are affected. Louisiana has the second-highest number of complaints on file at the CPSC, behind Florida.

The settlement affects an estimated 2,000 to 3,000 homeowners in Louisiana, Texas, Mississippi and Alabama, where Interior/Exterior was the primary distributor of Knauf-brand drywall, and probably a handful of households in Florida, if they bought their drywall across the state line in Alabama.

But while the deal is an important step forward in getting money to homeowners and could prompt other players to settle, people probably won't see the money anytime soon.

As settlements are reached with companies that had a hand in the drywall fiasco, money will be deposited into an escrow account, and at some point, Judge Fallon will figure out how to distribute it. The parties to the deal have requested that the court appoint a special master to help allocate it.

"It's not going to produce dollars in anyone's pocket right away," Herman said.

Under the terms of the settlement, attorneys can earn up to 32 percent of the settlement in fees, plus expenses. That allocation will also be made by Judge Fallon at a later date.

Tuesday's settlement builds upon a deal that was reached in October with Knauf Plasterboard Tianjin, a Chinese manufacturing unit of the German company Knauf Gips. Knauf and other entities that dealt with the problem drywall, including Interior/Exterior, agreed to pay for a pilot program to remediate 300 homes with Knauf-brand drywall in Louisiana, Mississippi, Alabama and Florida.

The program launched in February with homes in Florida, and in March with homes in Louisiana. About 49 homes are under remediation or have been completed, another 100 are ready for work to begin, and another 60 to 70 are in the process of being enrolled, Knauf attorney Greg Wallance said Tuesday in court. "The task ahead of us is to increase the output of the assembly line," Wallance said.

The goal of the program was to get a more realistic sense of what it costs to repair a home with bad drywall, and use it to confect a larger settlement.

Homeowners across the Gulf South were frustrated to learn that they're in for a long wait for access to any dollars that will flow from Tuesday's settlement.

George and Raffy Rigney built a home in Hammond after Hurricane Katrina, only to find that it's filled with Knauf drywall from Interior/Exterior. They've continued living in the home with their two daughters, despite appliance and electronic failures, respiratory ailments and allergies, because they have nowhere else to go.

George Rigney said they were on the initial list filed in court last fall for the repair pilot program, and they were so excited that they started packing at the beginning of the year, but they have yet to hear from the Florida contractor handling the program for Knauf. Tuesday's news of a settlement is just one more test of their patience.

"It sounds like good news. Their liability insurance has agreed to settle. They'll be able to use that to repair homes," Rigney said. "Everything's taking a while. The pace has gone slow."

Several other New Orleans area homeowners said they were afraid to comment on the deal for fear that it would jeopardize their prospects of getting money.

Rebecca Hohne, a homeowner in Birmingham, Ala., also had Knauf drywall from Interior/Exterior. She moved out of her home 16 months ago after she and her then 2-year-old son Tyler kept having respiratory and skin problems that they believe were caused by the drywall, and she's tired of paying rent and being away from home.

"It's been a financial nightmare," she said. "The settlement, honestly, it's horrible. The money is just going to be sitting there. It's not going to be helping anyone."

"We've already been waiting for two years," she said.

Fallon said that he normally would prefer to have all parties come together in one big settlement, but the Chinese drywall case is so complex that the only way to go is to tackle it in bite-sized pieces. Still, Fallon said he thinks pilot programs are potentially the most promising approach to the toughest cases, and the Knauf template could be useful in other disputes.

"I think we've got the momentum because of the pilot program," Fallon said. "Hopefully, we'll have some breakthroughs now that the pilot program is in full swing and the InEx matter has been resolved."

Fallon frequently says that he hopes the parties to the case will be able to use the information they glean from the pilot program to "monetize" the case.

Herman said negotiations with all parties continue, but broad settlements that will cut checks to homeowners are not yet within reach.

The Home Builders Association of Greater New Orleans also blasted the court proceedings for dallying with the pilot program and not getting money directly to homeowners to make repairs. The builders group is in a unique position in the litigation: its members are the public face of the drywall problem to angry homeowners, but don't have the money to go out and fix homes, and meanwhile, the ailing economy has left them hungry for work that the drywall remediation could easily provide.

"Any type of effort toward negotiated settlement is productive, but it's been several years since the tainted drywall arrived in Louisiana, and the majority of the homeowners that are affected are not back in their homes as a result of remediated or renovated homes. Any other settlement areas that don't immediately facilitate remediation and renovation, it clearly just delays what has already been a nightmare for these homeowners," said Jon Luther, executive vice-president of the builders group. "The more layered impediments that are in place between those who are paying into the funds and those who need to gain from it -- the homeowners -- that's problematic."